No Man’s Land

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The key event on the calendar is the next Fed decision on Wednesday, June 19. If the Fed strikes a hawkish note, all bets are off. However, should they refrain from suggesting imminent tapering that may well give the market license for a scorching summer rally.

To the surprise of most market participants, the Fed did indeed strike a hawkish tone and suggest imminent tapering which could begin as soon as September. In response, the market experienced the worst selling of the year. At Monday morning’s lows around 1560, the S&P was 127 points (7.5%) off its May 22 intraday high.

In tennis, no man’s land is the uncomfortable area between the service line and the baseline where a player cannot easily hit a volley or ground stroke. Players in this situation are like a fish out of water or Rafael Nadal in the early rounds of Wimbledon. As a result of the Fed’s intention to taper and the resulting technical damage, the market now strikes me as being in no man’s land.

“When the facts change, I change my mind” said J.M. Keynes. The incredible rally over the last 7 months, spurred by massive injections of liquidity by the Fed, has been undermined. It is hard to envision the market making new highs if the Fed does in fact taper. On the other hand, they are just talking at this point. By the time September rolls around, things may look very different and the Fed may be singing a different tune.

For my part, I have liquidated most of our trading positions and raised cash. I am holding on to our core long term positions, both long and short, but I am waiting for more clarity before further defining our portfolios for the short and intermediate term.